David Bennett

“Today, we’re going to do things a bit different,” warned Joe Nicosia at the outset of his talk on cotton markets at the 2018 Mid-South Farm and Gin Show in Memphis. “We’re going to cover the world briefly, and then we’ll have an intervention. So, if you’ve got a seatbelt, put it on.”

The main message of Nicosia, senior head of the cotton and merchandising platforms for Louis Dreyfus Commodities and vice president of Louis Dreyfus Commodities LLC, came with his first slide showing a stack of boxes from Amazon placed on a front porch. “They show up when you want, when you need it, right at your door. Is it changing the world? Sure is, isn’t it?”

Before getting into the Amazon comparison deeply, Nicosia first laid a foundation by showing what has happened in recent years.

Looking back

At the 2017 Farm and Gin Show, what did Nicosia talk about?

“First, the world was reflating, cotton was recovering and things were starting to look up. Estimates at that time were for 11 million acres in the United States. USDA had estimated 11.5 million acres — half a million more than the National Cotton Council (NCC).

“We also talked about exports, that the export demand was taking off.

“We talked about China like we have a lot over the years. We talked about the time we had two balance sheets when China controlled the world’s stocks in reserve. But those reserves were working down and at some point in time we’d be back to one balance sheet in the world again. We talked about China’s (cotton) production, about the imbalance they’d have and there would be a deficit of somewhere between 13 million to 15 million bales in the coming years. And their reserve stocks would move down from extremely high levels … to where they’d stop liquidating their reserves. That would bring them back to being a large importer.”

Nicosia also looked back to last year’s “big question where I challenged you, challenged the NCC. I said, ‘We need a vision to produce 20 million bales by 2020 because the world was going to need it.’”

Knockout!

So, what happened?

“A knockout! We had one big crop. We did it. Cotton futures moved up to 75 cents. Acreage, after dropping 10 million acres two years before, recovered 9 million acres in one year around the world. If you look at the world excluding China, the acreage went up 8 million — the most ever in recent times. So, even after five years of decreases in China, even they increased acres.”

More importantly, the U.S. production goal was met. “We made 20 million bales before 2020.”

Nicosia told the overflow crowd to focus on two things.

“First, the world’s acreage is about 82.5 (million) — close to where we were back in 2010 through 2013. China went from 13.5 million acres down to 7.2 million. Yes, it increased back to 8.4 million, but even though they had giant yields on that their acreage is still substantially smaller than in the past.”

Second, what about production?

“When you put all the main countries that grow cotton and are your competitors, every one of them grew more cotton. What does that mean? It means you’d better get ready for a fight. You may have won the production war, but that isn’t the only battle in front of you.”

Check out the world cotton balance sheet in 2017-18, he said. “It’s roughly in balance: we used 120 million bales and grew 121 million. Our ending stocks are still fairly large, although we believe it’s lower than (the USDA estimate) of 88 million bales. As for consumption, we went from 114.7 million to 120.5 million. We’ll take that all day long.

“According to the USDA, for the first time, consumption of the main cotton-producing countries — Bangladesh, India, Vietnam, Turkey, and China — “every single one of them is up. Before, when others were up, China was down. When China was up, others were down. That’s good news because it means it’s broad-based because they ship to many places in the world for many different uses not to mention their own domestic uses. ”

Balance sheet

What about the USDA balance sheet? Do they have it right?

The USDA recently released the 2017-18 and 2018-19 numbers. For 2017-18 the production number is 21.3 million bales. “We aren’t going to grow 21.3 and anticipate the number will come in smaller. We’re not sure how much smaller because the harvest in Texas goes on a long time and the crop is big. So, we’ll plug in somewhere between 20.8 (million bales) and 21.1 million.

“Exports are 14.5 (million bales) this year and 16 million next year. Last month, they cut it from 14.8 million. We’re selling a lot of cotton, and there’s demand for it, so why’d they cut it? They cut it because we can’t ship it. They say we’re so far behind and our industry doesn’t have the capacity to ship our bales, so they cut it.”

That leaves a carryover of 6 million bales.

“That isn’t a good number. The United States carrying that much isn’t good. Next year, they have exports at 16 million bales, and that’s pretty darn good. But they have our carryout at 6 million again. I guarantee you, if our carryover for the next two years is 6 million (the cotton) price is going straight down. That’s too much.”

But do the numbers add up and fit?

“For 2018 production, it seems and feels and all the talk has been, because we’re so positive on cotton, that the acreage increase is going to be large in the United States. But when you look at grain prices, they’ve moved up quite a bit recently. Soybeans are up 2 percent, cotton is up 3.8 percent, wheat is up 15 percent, even corn is up (0.5 percent).

“So, can I stand here today and tell you to plant cotton because the alternatives are bad? I can’t do that, and you know better than me the benefits of rotation within your own fields.”

2018 growing season

What about the wild card, the kind of growing season 2018 will provide? Nicosia showed a slide of the current soil moisture index in the United States.

It shows a lack of moisture “in west Texas, the highest concentration of cotton land in the world. It’s dry. The forecast for three months … shows the forecast for the Southwest for rain is low. So, the outlook doesn’t look good.”

The NCC estimates for 2018-19 — with 13 million acres, an abandonment of 15.4 percent and a yield of 842 — shows a crop of 19.42 million bales. “We had a dry year in 2013-14. If we use the same metrics (for 2018), we come up with a crop of 16 million. If you apply the metrics of last year, including two hurricanes and a freeze, we get 22 million (bales). The difference between the two is probably 40 to 50 cents in price — pretty dramatic.

“Using a five-year average, we come up with a production of 19.9 (million bales). The problem is we rarely get the average.”

The latest world balance sheet from the USDA has production for 2018 down to 117 million bales. Consumption is estimated to be up to 123 million bales. “They have world ending stocks dropping 5.9 million bales. They have exports going up from 38 million to 40 million.”

With that background, Nicosia said to ask yourself these questions:

• If futures prices remain above 75 cents for 2018-19, will world cotton area decrease by 3 percent as the USDA projects?
• Is the USDA’s anticipated 10 cent drop in the A-Index to 73 cents consistent with a 2 percent increase in world consumption and 5.9 million-bale (6.7 percent) reduction in world ending stocks?
• Will the impact of the proposed increase in the Indian minimum support price for 2018-19 cotton outweigh the negative effect of the pink bollworm that the USDA expects (6.5 percent decrease from 12.3 million to 11.5 million hectares)?
• China is one year away from requiring additional imports to meet its deficit. Will China begin ramping up imports this year?

“We’re one year away from China requiring a substantial amount of imports to meet their deficit. Will they begin importing early, or not?”

Editor’s note: a story to follow will provide Nicosia’s take on the great importance of shipping cotton to world customers more rapidly.